How do we rebuild shareholder trust on executive pay

Appendix 2: The APRA remuneration
and governance standard
APRA has stated that its supervisory focus in
respect of its remuneration requirements will be
on genuine board involvement and engagement,
demonstrating independence from management,
gauging the adequacy and appropriateness of the
remuneration policy (especially in its linkage to risk)
and actively monitoring the implementation of
the policy.
In the first six to t<strong>we</strong>lve months, APRA will be
seeking information on the implementation of
its remuneration requirements (particularly from
larger institutions) and will assess peer institutions
together. Where APRA judges that the remuneration
arrangements of a regulated institution are likely
to encourage excessive risk-taking, it has several
supervisory options, including the po<strong>we</strong>r to impose
additional capital requirements on the institution.
By 1 April 2010 the board remuneration committee,
with appropriate composition and charter, will
need to be established and a written remuneration
policy that is largely compliant with the governance
standards will need to be in place. Regulated
institutions must ensure that contracts in force
as at 1 April 2010 are fully compliant at the first
reasonable opportunity for renegotiation, and in
any event by 31 March 2013.
In addition, it is APRA’s expectation that
regulated institutions negotiating or renegotiating
contracts bet<strong>we</strong>en the release of the revised
governance standards (1 December 2009) and
their commencement date will be fully cognisant of
APRA’s requirements and will begin the transition
during this period for existing arrangements that
would not meet the revised standards.
Prudential Standard summary
• The board must establish and maintain a written
remuneration policy. This policy must:
– outline the remuneration objectives and the structure
of the remuneration arrangements, including
performance-based pay
– encourage behaviour that supports long-term
financial soundness and the risk management
framework
– reflect:
a) the outcomes of business activities
b) the risks related to the business activities taking
account, where relevant, of the cost of the
associated capital
c) the time necessary for the outcomes of those
business activities to be reliably measured
– provide the board with discretion to adjust
performance-based components of remuneration
<strong>do</strong>wnwards, to zero if appropriate, if such
adjustments are necessary to (a) protect the
financial soundness of the regulated institution; or
(b) respond to significant unexpected or unintended
consequences that <strong>we</strong>re not foreseen by the board
remuneration committee
What this means / PwC view
• Ensure that your company’s remuneration policies
not only reward long-term sustainable value creation,
but that they also appropriately incorporate risk.
• Understand how long it takes to reliably measure
performance and assess the applicable risks at a
business activity level. There may be challenges in
both obtaining a granular understanding of the risks
which exist in relevant businesses and also what
metrics to use to assess such risks.
• Determine whether one deferral period is still
appropriate across the various business activities
or if there needs to be different deferral periods for
different activities. Maintain the focus on simplicity
where possible.
• Consider how to incorporate such discretion into the
incentive plans.
PricewaterhouseCoopers Executive Remuneration – Fourth Edition 2010 | 53